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Thursday, December 15, 2016

Brokers Report: TNB - ICPT Rebate Continues

Maintain outperform with unchanged target price (TP) of RM16.16

Tenaga Nasional (TNB) made an announcement that the government has agreed to an electricity tariff rebate of 1.52sen/kWh for the period effective 1 January to 30 June 2017 under the Imbalance Cost Pass-Through (ICPT) mechanism, amounting to RM766.3m. There is no impact to TNB's earnings however as the rebates given to consumers for the first half of 2017 will be absorbed by the ICPT savings. Hence, we maintain our earnings forecast while our Outperform call on TNB is reaffirmed with an unchanged TP of RM16.16.
  • ICPT rebates continue.. for now. The government has approved an ICPT rebate of 1.52sen/kWh for the period effective 1 January to 30 June 2017, applicable to all consumers except ones with monthly consumption of 300 kWh and below. Favourable generation cost through better performance of coal-fired power plants, lower liquefied natural gas (LNG) prices and lower usage of gas contributed to the RM766.33m in ICPT savings. Our concern remains on the recent spike in coal prices and the weakening Ringgit. The coal price base tariff is currently set at USD87.50/MT (RM3.14/USD). TNB’s anticipated annual coal consumption of 25.4m MT at an average coal price of USD100/MT (RM4.40/USD) will result in higher costs of approximately RM4.2bn, leading us to believe there may be a chance that the government may impose a surcharge instead in 2H 2017, though likely to be partially cushioned by its savings from the first generation PPA.
  • Revision on subsidised gas price. Under the Incentive Based Regulation (IBR) framework, the regulated gas price for the first 1000mmscfd will be increased by RM1.50/mmBTU every 6 months until it reaches the market price, as part of the energy subsidy rationalisation programme. With effect from 1 January 2017, the regulated gas price for the power sector is being increased from RM19.70/mmBTU to RM21.20/mmBTU.
  • No impact to earnings. The electricity base tariffs will remain at 38.53sen/kWh under the IBR framework for the regulatory period until end-CY2017. Meanwhile, the rebate given to consumers in the form of lower electricity tariffs will be absorbed by the ICPT savings hence having no impact to TNB's earnings. Correspondingly, we leave our earnings forecast and assumptions unchanged. Our Outperform call sand DCF-based target price of RM16.16 is reaffirmed.
  • Change in dividend policy. Regarding TNB’s recent plan to change its dividend policy from 40%-60% of company’s free cash flow to 30%-50% of its core net profit with effect from FY17, we adjust our dividend payout estimation to 40% (previously 23%-25%), which translates into a higher DPS of 49 sen to 51 sen for FY17F-19F respectively.

Source: PublicInvest Research - 15 December 2016

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